Business Irish

Sunday 18 February 2018

Dan White: Banks may need another bailout

Dan White

Dan White

The appalling level of buy-to-let mortgage arrears, which are running at twice the level of those among owner-occupiers, casts further doubts over the adequacy of the capital buffer provided by the Government last year to cover the banks' mortgage losses. With the level of residential mortgage arrears also continuing to rise, yet another bank bailout is looking increasingly likely.

This week, the Central Bank is due to publish its latest mortgage arrears statistics. For the first time these will include figures on the rate of arrears on buy-to-let mortgages on houses and apartments purchased by investors.

Ever since the property bubble burst there has been plentiful anecdotal evidence of amateur property investors who got in way over their heads. After borrowing huge sums to buy rental properties they were hit by a double whammy of a collapse in property values and rents.

Ahead of the publication of buy-to-let arrears, the word from the Central Bank is that arrears on buy-to-let mortgages are running at a scary 29 per cent.

Between them the three Irish-owned banks – AIB, Bank of Ireland and Permanent TSB – have about €94bn of mortgages on their books of which around €71bn are to owner-occupiers and €23bn are buy-to-lets.

Also, Irish-based banks, both domestic and foreign-owned, have securitised, ie sold on to investors, about €36bn of mortgages. The proportion of buy-to-lets in these securitised mortgages is not known.

Even if the Irish banks are off the hook for these securitised mortgages, they are facing huge losses on their buy-to-let mortgage books. With almost a third of these loans in arrears and more likely to follow as interest-only periods for borrowers expire, the banks could be looking at losses of up to 50 per cent on these loans. That equals losses of €11.5bn, which alone exceeds the €9.4bn provided for mortgage losses in a "worst case scenario" by last year's bank stress tests.

With the level of arrears on owner-occupier mortgages also continuing to increase will the Irish banks need yet another bailout from the taxpayer? Don't bet against it.

Glanbia's big move

The vote by Glanbia Co-op shareholders in favour of spinning off Glanbia PLC's Irish dairy-processing operations into a separate company wholly owned by farmer suppliers opens the path for a radical restructuring of the entire Irish dairy-processing sector.

Last week's vote must be seen in the context of the end of EU milk quotas in 2015. The quota system artificially depresses Irish milk output to just five billion litres a year. Agricultural economists have predicted that milk output could quickly leap by 40pc to over seven million litres when quotas are abolished. In the medium term, it could go even higher – New Zealand, which produced a similar volume of milk to Ireland when quotas were first introduced, now produces 19 billion litres.

This creates a once-in-a-lifetime opportunity to restructure the Irish dairy-processing sector and generate huge economies of scale.

Now that Glanbia's Irish dairy-processing operations are firmly back under farmer control, will Kerry follow suit? If it did, the path would be clear for the creation of a single, large dairy processor to process the vast bulk of a massively increased milk pool.

Other banks unlikely to follow IBRC on auditors

Will last week's announcement from IBRC, formerly Anglo, that it is suing its auditors Ernst & Young be followed by similar litigation from the other Irish-owned banks? With the taxpayer having shelled out €63bn to fix our broken banks, could we get some of this money back by suing their auditors?

In fairness to Ernst & Young, it has pledged to "vigorously defend" the case being taken against it by IBRC. However, if any of the other Irish-owned banks are contemplating suing their auditors they had better get a move on.

There is a six-year deadline for bringing legal action so further delay would mean that the banks' 2006 accounts would be off-limits in any legal case. Given the length of time that has already passed, it seems unlikely that any of the other Irish-owned banks will actually sue their auditors.

Meanwhile, it's an ill wind that blows no good. Deloitte was the only one of the accountancy "big four" to dodge the Irish banking bullet. This meant that when Anglo changed its auditors following the 2009 nationalisation, Deloitte was a shoo-in for the job. In 2011, Deloitte was paid a not inconsiderable €700,000 for the IBRC audit plus a further €400,000 which it received for various non-audit services.

Sunday Indo Business

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